SEC May Offer Guidelines to Cut Sarbanes-Oxley Costs

By Laurence Arnold and Vineeta Anand -
May 10, 2006

The U.S. Securities and Exchange
Commission, under pressure to reduce costs of complying with the
Sarbanes-Oxley Act, may offer guidelines to company managers in
the next few weeks on corporate governance audits.

``Management and auditors clearly have different duties and
responsibilities,'' SEC Chairman Christopher Cox said at a
hearing today in Washington about the law's effect on companies.
``Wouldn't management benefit from having guidance from the SEC
on what constitutes adequate controls?''

Cox told reporters he hoped the SEC and the Public Company
Accounting Oversight Board would announce their next steps
``within the next few weeks.'' After a similar gathering last
year, the SEC gave auditors guidance on how to assess a
company's controls to prevent fraud and accounting errors.

Two years after the law took effect, some executives say
Sarbanes-Oxley auditing costs remain too onerous, particularly
for smaller firms. Regulators suggest they may be ready to rely
more on company managers and modify rules to lower audit bills.

``What we hear today will give us guidance for adjusting
and improving the rules,'' Bill Gradison, acting chairman of the
accounting oversight board, said in opening remarks. ``It would
seem that some further changes may be in order.''

The current system fosters duplication of effort by
managers and accounting firms, said Joseph Grundfest, a panelist
and former SEC commissioner, in an interview.

``The auditors have to be comfortable that they can
legitimately rely on the work that management has done, but that
doesn't mean auditors should repeat every step that management
has done along the way,'' Grundfest said.

Company Costs

Cell Genesys Inc., a biotechnology company at work on
cancer vaccines, said its Sarbanes-Oxley costs rose last year,
taking money away from research.

``If you are a small company, every penny has to be put
into the primary mission of the business,'' Cell Genesys Chief
Executive Officer Stephen Sherwin said at the hearing. ``And for
us, that's inventing new products for human health.''

The South San Francisco, California-based company spent
about $5 million on administrative costs, mostly for Sarbanes-Oxley compliance, in this year's first quarter, Sherwin said.
The spending rose from $3.8 million in the year-earlier period.

Protecting Investors

Other witnesses said the Sarbanes-Oxley law is working as
intended, protecting investors by eliminating some of the
concerns about company controls.

``There has been improvement in disclosure,'' said Dennis
A. Johnson, a senior portfolio manager with the California
Public Employees' Retirement System, the largest U.S. pension
fund. ``Members of the audit committee are of better quality.
They are far more engaged. Better planning seems to be taking
place at the board level.''

Investors are loath to have companies spend millions of
dollars on checks and balances aimed at transactions that are of
little significance, Robert Pozen, chairman of MFS Investment
Management, a Boston-based mutual fund company, said in his
written testimony.

``There is no doubt that the SEC will issue guidance for
small companies, but whether it is meaningful, I don't know,''
Pozen said in an interview.

Ideas about how the SEC might lower costs while still
maintaining the protections of Sarbanes-Oxley are proliferating.

``What we don't want is the PCAOB and the SEC second-guessing companies and their auditors over internal controls,''
Nusbaum said in an interview.

New York Stock Exchange Chairman Marshall Carter,
testifying April 26 before the House Financial Services
Committee, said the SEC should change the frequency of full-scale auditor reviews from annually to once every three years.

Companies would have to review every year only those
accounting and other practices ``where the risk of material
misstatement would prove harmful to investors,'' Carter said.

An advisory panel to the SEC recommended on April 23 that
all but the largest 20 percent of publicly traded companies be
exempt from the audit provisions of Sarbanes-Oxley, ``unless and
until'' the agency creates a cheaper compliance plan.